The way things are going we can see another set of rate cuts until economic growth improves, the manufacturing sector is showing no sign of improvement six months in row NAPM index is below 50, if we compare it to 95 we would see that we hit similar lows on NAPM. It was that activity pick up from the low NAPM in 95 to highs of 58 in next couple of years during these years we did see equally important run in stock markets, although we had Mexico behind us but demand from ASEA was great, now if this manufacturing activity has to pick up which any way is the bed rock of economic growth going forward the aggregate demand globally has to improve. I expect it will take few months before these interest cuts can have impact on the manufacturing sector, housing is great and lower interest rates may trigger further activity but as must have found from previous link the problem in housing is availability of skilled workers, in my opinion we should see strong economic growth if we need to overcome this liquidity crunch in absence of that the mix of falling prices , lower commodities alongwith slackening manufacturing sector will certainly slow down the huge tanker US, it may take some time but slowing down as would be normal would seriously impede the profit projections of industrial sector.
I will like to see this NAPM inching up from these lows as of next month and should breach this 50 mark in next three months, the prospects of Europe are so far good I would bet growth above projections but the area that concerns me most is the inactivity of the secondary bond market for cheaper issues the divergence is not on sight and most of the money of many a huge funds is tied and betting on a convergence, lack of liquidity in the secondary markets is helping the prime securities go higher resulting in the yield curve which you are right now looking at. It is a question of confidence and right now unwillingness of big money to commit to high yielding lower quality bonds reflects that lack of enthusiasm of global financial community.
Until confidence is restored and strong economic numbers can only justify it the liquidity crunch will not be alleviated and unless that happens we will see higher volatility as coward capital runs from one place to another to find returns, it is for this that we see Swissy and Sterling all over the places, sterling becomes a kind of safe haven but only because it pays higher interest. The moment future bleak economic forecasts emanate from UK the money ditches sterling looking for some other source resulting in movements from 1.72 to 1.64, we will see these wild rides but concerted efforts by global central bankers to ease will pay dividends-
Bundesbank was pursuing price stability little too long equally was the BOE which pursued tight money policies for too long, they were chasing non-existent inflation. Unfortunately pursued of these tight policies, huge loan losses raked in developing countries and greed of Hedge Funds to make exorbitant returns have made some dent on the global economy, I think the only way these financial scars can be removed is time and prompting of aggregate demand, consumption needs to be stirred, the only problem AG is concerned is that if ASSET bubble bursts we may be trapped in that recessionary or deflationary cycle for far too long- I would think to avoid that we may see few more cuts so that short end of the curve drops more and the long end moves higher, don't forget the dropping bond yields are helping US budgetary deficits as amounts due for servicing are being reduced drastically, with low inflation the only missing link is strong growth if we can see the trend of last year continued we may see that this period of consolidation may be good for market..
Japan and US interest rates are not comparable Japanese are just not spending and banks carry 1 trillion $ of bad loans in case of US the financial sector is liquid and 55% of US populace think that even after steep correction their sending pattern will not change. Last but not least is the sophistication of Japan's populace saving unfortunately it is saving which is return-less, sits in the post offices this is again at variance to US where people have regularly being contributing to stock purchases through their savings and retirement plans, so the bursting of equity bubble in Japan was under quite different circumstances, even the big corrections of the past until 1987 never really had seen so much wealth to be contributed as percentage of savings to capital markets..
We will see normal yield curve once the fear of something next year happening reduces right now 70% of US populace worries that global markets will be worst next year and we have yet to see the worst.. Thanks |
